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Establishing a Baseline Price4:02 with Pasan Premaratne
Before you can pick a pricing method, you need to understand what goes into a price. A good price should reflect your costs, skill level and desired profit. Let’s go over how we can calculate such a price.
Formula for calculating your hourly rate:
- Calculate your direct and indirect expenses
Annual expenses = Sum of:
- Employee salaries and benefits
- Advertising and promotion
- Outside professional services
- Office supplies
- Business taxes
- Client services
and any other expenses
- Calculate number of working hours
Working hours = (Number of working days a year - holidays - vacation time) * Number of hours worked per day
- Calculate hourly rate:
Hourly rate = (Annual Expenses + Profit Margin) / Number of working hours
[Pasan Premaratne] Regardless of the pricing method you go for, you have to establish a baseline.
The price you charge for a project should be enough to cover your expenses, billable work hours, and bring in some profit.
Rather than just picking a random starting figure because it's what other people in the industry charge,
calculating the best rate for you will allow you to accurately evaluate your financial progress.
To calculate an hourly rate, start by totaling all direct and indirect expenses for the year.
This includes things like rent, utilities, insurance, employee salaries & benefits, advertising & promotion,
outside professional services, equipment, office supplies, business taxes, and client services.
Next figure out the number of hours you plan to work in a year.
Start by calculating the total number of days you want to work and the number of hours per day.
If you're sticking to a 9-5 schedule, 5 days a week, that's roughly 251 working days a year—taking into account holidays and weekends.
If you want to work 4 days a week, that's perfectly fine as well. You are in charge of your own schedule.
Deduct any planned vacation time or time outside the business from this total,
and you have a rough idea of the number of hours you will work during the year.
Add to your total expenses a reasonable profit margin—usually anywhere between 10-15%.
Divide this figure by the number of hours you plan on working.
This resulting hourly rate should cover all the costs of running your own business, including your own salary.
Say your annual expenses are around $72,000. You add a 10% profit margin of $7,200.¾
Divide this by the number of hours you work.
So let's say I work 241 days at 8 hours per day, which is 1,928 hours.
Divide this $79,200—your total expenses plus your profit margin—by the $1,928 to arrive at your approximate hourly rate.
For this example, that's $41 per hour.
Now when calculating working hours, most professionals don't include time spent on administrative work—
things like writing proposals, billing, and self-promotion because that's not strictly client work.
Other freelancers use a multiplier that's unique to the project—a creativity coefficient.
This number is a multiplier of your base rate to help you match the price you charge
with the level of creativity and difficulty of each project.
Creativity coefficients can be close to 1 for projects that are dead easy for you and stuff that you do all the time.
But as difficulty or uniqueness of the project increases, so does the coefficient.
With an hourly rate when you consider a project, you should carefully estimate the number of work hours.
You can then multiply this rate by the hours to figure out whether the client's budget at least covers your costs.
If it doesn't, you can negotiate with the client for a higher fee, propose a different solution for the project that takes less time,
talk about reducing the number of features implemented, or whatever is needed to come to a mutual agreement.
Coming up with a per project price involves roughly the same approach, but is more appropriate for freelancers who have experience.
Say product landing pages is your specialty and that over the years you've found out that it takes you 2 weeks to do it.
You calculated your baseline rate awhile back and found it to be $40 an hour.
Given these numbers and some rough calculation, we can say that you should be charging $3,500.
After doing it for awhile if another landing page comes in, you know off the top of your head that the minimum fee for this project
should be $3,500.
Without having to drill down into hours and cost, you can comfortably tell the client
that it will cost them around $4,000 for the whole project.
Per project pricing is always more attractive to clients but it comes with experience, doing this for awhile, and knowing your numbers.
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